Thanks to advancements in medical technology, Baby Boomers now entering retirement can expect to live another 20 or 30 years. Maybe longer.
Which is great. But it also requires much more planning for future financial and physical needs than most Americans are willing to do.
We all like to think we'll have the same abilities and independence at 85 that we had at 65, but that's just not reality. If you're 65 today in the United States, there's a 70% chance you're going to need some kind of long-term care during your life, according to the U.S. Department of Health and Human Services.
And that care -- whether it's at your home, an adult day care center, a nursing home or an assisted-living facility -- is expensive. Genworth's annual Cost of Care Survey found the national median rate for a private room at a nursing home in 2016 was $7,698 per month. Staying home is cheaper, but not cheap. The survey found the median rate for an in-home aide was $3,861 per month. And those costs are increasing.
The problems with Medicare and Medicaid
If you think Medicare will pick up the tab, think again. It will help pay for a short stay in a skilled nursing facility, hospice care or home health care under certain conditions, but that's it. Beyond that, it's going to come out of your pocket. If you can't afford to pay, another option -- one that many Americans rely on -- is to spend all your assets to qualify for Medicaid.
It's not a great answer, though. When you're on Medicaid, you lose a lot of choice about the type of care you're going to get. And your medical costs will chase you. If you have equity in a home, your estate will get those bills after you die.
Relying on Medicaid to cover your care will be financially devastating, especially if you have a surviving spouse, who will be left with greatly depleted resources.
So, obviously you need a plan -- and you need options.
About long-term care insurance
The traditional way to go is long-term care insurance. Much like term life insurance, you pay a set premium that typically goes up as you age, until it hits a specified maximum. To receive benefits, the buyer must need assistance with at least two of six "activities of daily living": bathing, dressing, continence, eating, toileting and "transferring," such as moving from a wheelchair to a bed. Like most forms of insurance, if you don't use the benefit, you lose it; the insurance company keeps your money. And long-term care insurance is both expensive (costs have spiked over the years) and difficult to find. Fewer and fewer insurers are issuing policies, and in some states, it is simply unavailable.
Other insurance possibilities
But the insurance industry is offering alternatives, including "living benefits" products that combine life insurance with long-term care. They allow you to accelerate your policy's benefits to get much-needed money if you suffer a terminal, chronic or critical illness. If you don't need care, the money goes to your heirs or your estate when you die via the life insurance death benefit.
A similar solution is asset-based long-term care insurance. Instead of paying premiums, you deposit a lump sum of money with the insurance company. If at some point you require care, the insurer will pay you benefits based on how much you deposited and how old you were when you purchased the policy, the earlier you start the more benefits you get for your dollar. If you ever decide you don't want the policy, you have options for getting your money back. And if you die without needing care, there is still a death benefit for your heirs.
There are also annuities with long-term care benefits.
Some work much like the asset-based life insurance policies: You put in a lump-sum deposit and you'll receive some interest on that. Then, if you need long-term care, a multiplier is applied to the cash you put in. For example, if you put in $100,000 and you need long-term care, that amount blossoms to $300,000 to put toward long term care expenses.
Another annuity option offers an income rider. You put in a certain amount of money and the company will, depending on your age and when you want to start taking distributions, guarantee a certain rate of income. But if you need long-term care, that income is doubled. So, if you had an annuity that guaranteed $40,000 annually in income, it would double to $80,000. It may not cover all your expenses, but it certainly will help.
As a last resort
If you didn't plan for long-term care costs and now it's too late to get coverage -- you're too old, or sick or it's prohibitively expensive -- talk to an elder-care attorney. He or she can help you protect as much of your estate as possible from Medicaid's requirement that you spend down your assets.
Long-term care planning is something a lot of people ignore. They think they won't get sick, or that they'll die quietly in their sleep without ever spending a day in a nursing home or needing aid. Unfortunately, the statistics say that the majority of people will need some sort of care assistance, and planning for that is important.
But it's an important part of any retirement and estate plan. And the sooner you do something about it, the more benefits you'll get for your dollars. If you wait, qualifying will become more difficult and the breadth of products will start to disappear.
If you already have a traditional long-term care insurance policy, it could be the best investment you ever made. But if you're still looking for a way to cover yourself as you age -- and most Americans need help with that -- these options are worth looking into with assistance from your financial professional.
Investment advisory services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. SEC registration does not imply any level of skill or training.
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Copyright 2017 The Kiplinger Washington Editors